Corporate Tax Flashcards
1
Q
Corporate Income Tax Calculation (1120)
A
Gross income (worldwide) - Ordinary Deductions =Income before "special deductions" - charitable deductions - NOL carryforward - DRD = Taxable income x 21% tax rate = Gross Tax Liability - Tax Credits (Foreign tax credit/gen business credit) = Net Regular Tax Liability \+ PHC Tax = Tax Liability (self-assessed on 1120) \+ Accumulated Earnings Tax, if audited = Total Corporate Tax Liability
2
Q
Formation of a C Corp
A
- Cash or property 80% or more (control)
- –tax free
- –Carryover basis (if subject to debt, CV - debt)
- –Carryover holding period
- Services OR <80% of stock
- –taxable income at FMV of stock
- –Wage expense for corporation
- If no control, taxable to all parties
- Reorganizations of corporation generally also tax free, carryover basis
- If contribution of property
- – tax basis of property (if 80% or more)
- –FMV at the date of contribution (less than 80%)
3
Q
Capital Gains & Losses
A
- Sched D
- 21% corp tax rate
- Cap losses deductible to the extent of capital gains
- cap losses can be carried back 3 years and forward 5 years to offset capital gains
- All loss carrybacks and carryforwards are considered short term
4
Q
Revenue
A
- Recognized at the earlier of when earned or collected
- Earned when (1) all events have occurred that fix the taxpayers right to the income and (2) the amount can be reasonably determined
- Advanced payments must be recognized in the year received, unless the taxpayer makes an election to include only the part of the payment required to be recognized in the year of receipt and remainder in following year
5
Q
Deductions
A
- Claimed in accordance with the same matching principle used for GAAP purposes
- Expense can be accrued if the transaction meets both an all-events test and an economic performance test
- All events test - met when the existence of a liability is established and can be determined with reasonable accuracy
- Economic performance - when property/services have been provided.
6
Q
Deductions - Organizational Expenses
A
- Can deduct up to $5,000 of org expenses. Reduced by the amount by which the organizational expenditures exceed $50,000.
- Does not include costs of issuing, printing, and selling stock (reduction of APIC)
7
Q
Deductions - Salaries & Wages
A
- Must be paid out within 2 1/2 months after year end
- Can deduct up to 1M of compensation expense for certain covered employees
- Premiums on life insurance as long as the corporation is not the beneficiary
- Employee achievement awards for length of service - $400 under nonqualified plans and up to $1,600 for qualified plans per employee, must be tangible property
8
Q
Deductions - Start Up Costs
A
- Can deduct up to $5,000 of start up costs, reduced by which the start up costs exceed $50,000
9
Q
Deductions - Bad Debts, Warranties
A
- Bad Debts - direct write off method
- Warranty costs cannot be claimed until repairs are made
- Cannot deduct losses from lawsuits that haven’t occurred but are probably and estimable
- Marketable securities - only gains/losses recognized when sold
- Inventory - declines in market value deductible upon disposal
10
Q
Deductions - Meals & Travel
A
- 50% of meals if they are not lavish or extravagant or an employee was present
- All out of town travel costs
- Lodging expenses for non-away-from-home travel
11
Q
Deductions - Casualty Losses
A
- Business property - lesser of adjusted basis immediately before the casualty or decline in value
12
Q
Deductions - Goodwill, Franchises & Trademarks
A
- Amortized over 15 years for tax purposes
13
Q
“Special” Deductions - Charitable Contributions
A
- Claimed after all ordinary deductions (no NOL, DRD, CC)
- Limited to 10% of income before claiming deduction (CARES act makes it 25% through end of 2020)
- Unused amount carried forward 5 years
- Pledges can be accrued and deducted if paid within 3 1/2 months of year end
14
Q
“Special” Deductions - Net Operating Losses
A
- Carried forward indefinitely
- Limited to 80% of taxable income
- Current Year NOL = Gross income - excess allowable deductions + any NOLs carried forward to that year
- Carryforward NOL allowed = taxable income before the NOL x 80%
- CARES Act - repealed the 80% limitation for 2018-2020, NOLs may offset 100% of taxable income
- For taxable years beginning after 2020, the 80% limitation equals 80% of taxable income in EXCESS of any pre-2018 NOL carryover. Any pre-2018 NOL carried forward to a tax year after 2020 is fully deductible.
15
Q
“Special” Deductions - Dividend Received Deductions
A
- Schedule C
- < 20% ownership = 50% allowed DRD
- > = 20% but <80% = 65% allowed DRD
- > = 80% = 100% allowed DRD
- Does not qualify if:
- -Dividends from foreign corp
- -Borrowed the money to buy the investment
- Received from a tax exempt entity
- Owned for less than 46 days
- Rare exception - when DRD< TI before DRD< Dividend. DRD % is applied to TI before DRD instead of to dividend itself
16
Q
Penalty Taxes & Credits - Accumulated Earnings Tax
A
- Excessive retained earnings in judgment of IRS
- Tax on undistributed income only (20% rate)
- Reduced or eliminated if pay any of the following:
- -Actual dividend
- -Consent dividend - hypothetical dividends you pay taxes on even though no money was actually received
- If already paid PHC tax
- Safe harbor allows certain amounts to be retained:
- -$250,000 for manufacturing co, OR
- $150,000 for personal service corporations
17
Q
Penalty Taxes & Credits - Personal Holding Company Tax
A
- Applies to undistributed income of the corporation after deducting corporate taxes and net long term capital gains to arrive at undistributed personal holding company income (UPHCI)
- 20% PHC tax applied to UPHCI if both:
- 5 or fewer individuals own more than 50% of stock, AND
- 60% or more of revenue is from passive sources
18
Q
Penalty Taxes & Credits - Personal Service Corporations
A
- To qualify as a PSC:
- Substantially all activities involve the performance of health, law, engineering, etc
- 95% or more of the stock is owned by the employees performing those services
19
Q
Penalty Taxes & Credits - Foreign Tax Credit
A
US Tax Liability
x Foreign income/worldwide income
= Foreign tax credit (never to exceed actual foreign taxes paid)
- Credit not able to be taken can be carried back 1 year or forward 10 years
20
Q
Penalty Taxes & Credits - General Business Credit
A
- Equal to the sum of :
- Business credit carryforwards for the year
- Current year business credit
- Business credit carrybacks for the year
- Limited to the excess of the taxpayers net income tax over the greater of:
- The tentative minimum tax for the year, or
- 25% of the taxpayers net regular tax liability over $25,000
- Can be carried back 1 year and forward 20 years
21
Q
Supplementary Schedules - M-1
A
- Reconciliation of book income to taxable income
- Temporary differences - bad debt expense, warranty expense, depreciation differences
- Permanent differences - muni bond interest, 50% of meals, fines, penalties, premiums paid on key person life insurance, etc.
22
Q
Supplementary Schedules - M-2
A
- Reconciliation of unappropriated beg RE to end RE
23
Q
Supplementary Schedules - M-3
A
- Reconciliation of financial accounting income with taxable income
- Must be prepared in place of an M-1 if the corporation has $10M in assets or more
24
Q
Corporate Distributions
A
- taxable to the extent of earnings & profits
- dividends are treated as dividend income up to the greater of:
- Current earnings & profits, or
- Accumulated E&P
25
Termination of Corporation
- Corporation
- - Non-liquidating - Tax on capital gain, cannot deduct loss
- - Liquidating - Ordinary gain (capital if stock), ordinary loss (as if sold)
- Shareholder
- - Non-liquidating - Ordinary/dividend income (Up to E&P)
- - Liquidating - capital gain/ capital loss
